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Spotify D(PO)-Day

Arguably the most anticipated day in the history of digital music is upon us. By the end of it we will have the first hint at whether Spotify is going to fall at the Snap Inc. or Facebook end of the spectrum of promising tech IPO, or DPO in the case of Spotify. Of course, we’ll need a few quarters’ worth of earnings in place before firmer conclusions can be drawn as to the strength of Spotify as a publicly traded company, but the first 24 hours will lay down some markers. However, it is the mid and long-term market factors that will give us the best sense of where Spotify can get to. Here are a few pieces of pertinent market context that can help us understand where Spotify is heading:

Streaming is just getting going: Downloads are yesterday’s legacy market, streaming is the future. But streaming has a long way yet to go. To date, downloads have generated around $35 billion in revenue for labels since the market started. That compares to around $15 billion for subscriptions. Apple accounted for around $23 billion of that download revenue, Spotify accounted for around $5 billion of that subscription revenue.

Spotify retains leadership: While the streaming market is competitive, Spotify has retained around 36% subscriber market share. However fast the market has grown, Spotify has either matched or beaten it. Apple is growing fast too but is adding fewer net new subscribers per quarter than Spotify is. Fast forward 12 months from now, Spotify will still be the number one player. Fast forward 24 months, it will probably still be.

Tech majors want the same thing: Of all the big streaming services, only Spotify is truly independent. Apple Music – Apple, Amazon Prime Music – Amazon, YouTube – Google, QQ Music – Tencent, Deezer – Access Industries, MelON – Kakao Corp, and now, Facebook) all have parent companies that have ulterior business objectives with music streaming. None of them have to seriously worry about streaming generating an operating profit. This means that there is little pressure in the marketplace to drive down label rights costs. All of this means that Spotify is the only main streaming service that is trying to make the model commercially sustainable.

Spotify can’t be Netflix yet: As much as the whole world appears to be saying Spotify needs to do a Netflix (and it probably does) it just can’t, not yet at least. In TV, rights are so fragmented that Netflix can have Disney and Fox pull their content and it still be a fast growing business. If UMG pulled its content from Spotify, the latter would be dead in the water. So, Spotify will take a subtler path to ‘doing a Netflix’, first by ‘doing a Soundcloud’ i.e. becoming a direct platform for artists and then switching on monetisation etc. In the near-term Spotify will happily have record labels sign artists that bubble up on the platform. But over time, expect Spotify to start competing for some signings.

Unpicking the distribution lock: The major record labels represent around 80% of recorded music revenues globally on a distribution basis, but just 61% on a copyright ownership basis. They get the extra market share through the distribution they provide indies, either directly or via divisions like Sony’s The Orchard or WMG’s ADA. The 80% share gives the majors the equivalent of a UN Security Council veto. Nothing gets through without their approval, which acts as a brake on Spotify’s ambitions. But, if Spotify was to persuade large numbers of those indies distributing through majors to deal direct, then some of that major power will be unpicked, which, combined with increased revenue, subscribers and market share, would strengthen Spotify’s hand.

Right now, Spotify has soft power (playlist curation, user-level data, subscriber relationships etc.). Spotify’s long-term future will depend on it building out its hard power and bringing it to bear in a way that brings positives both for it and for its industry partners. That will be a tightrope act of the highest order.

If you want the inside track on Spotify’s metrics, get access to MIDiA’s latest report:

5 thoughts on “Spotify D(PO)-Day”

Probably the biggest BLUFF in the history of Wall Street. Subscriptions have been introduced by BBC in 1927! They are in force to this date in most of the European countries – in many cases at higher level than Spotify or AppleMusic monthly toll and NEVER made and valid contribution to music industry.
Streaming revenues even with billion users CANNOT and WILL NOT support old music industry with copy rights, musicians, music writers and streamers themselves.
Time to start play THE BEST for particular situation- sub and ad free – and charge for additions to personal playlists. Music has to become merchandise again – Google is our only roadblock.

It will be interesting to see if Spotify can fend off competition in what will likely be an increasingly competitive marketplace for digital music. For every one company that makes it big, thousands fail, no matter what industry. My sense is music is hyper-competitive, so even with the IPO advantage and early market presence and leadership, Spotify will have its challenges. Moreover, there seems to be an anti-technology bug creeping into the consumer population with ongoing issues with privacy and anti-commercialism fueling it. “Being in the moment” and appreciating nature, mindfulness, Eastern health practices, etc. are fueling a more “natural” and tactile approach to life where people want to “experience” art and music, as well as other products, in a more tangible and less digital way. Hence the growing popularity of live music and vinyl records. Spotify and other digital providers will have to deal with these trends, as the market is not all about consumers’ music tastes, but also reflects societal trends. Hard to take the people out of music, as much as the industry has tried though technology from synthesizers, drum machines and digital editing. The industry has tried, but can never seem to replace people. Long live the artist… the delivery mechanism for their art changes, but the artist remains central.